Crisis Triggers Reality Check in Spain Power Sector
The good thing about bubble-bursting is that it triggers change, however painful it can be. Myths that were nurtured for years fall apart unceremoniously, replaced by needed reality.
This is the reckoning Spaniards face, especially starting in January when their power bills increase nearly 10 percent, the highest rise in over a quarter of a century, now that the government approved the painful measure the last week in December.
The story is even more poignant considering Spain was a global poster child of power “sustainability.” After all, in 2010 the country generated more than a third of its electricity with renewable sources, all while shunning nuclear power, reducing its dependence on foreign energy sources, and creating hundreds of thousands of jobs in the process. Even President Barack Obama based part of his administration”s green policies on the Spanish example.
Overlooked by most though was the fact that the model was based on a decade-old political scam that was simply unsustainable. And the crisis exposed this reality. Now the real pain starts.
The original plan 10 years ago was to revamp the country”s power sector. The government began subsidizing consumer electricity bills and racking up a debt with generators to pay for the difference. Over time, regulated prices would increase and consumers would eventually pay for their debt, with interest.
Everybody was happy. Utilities could invest, consumers wouldn”t pay the huge upfront costs, and jobs would be created. The grid was modernized and expanded, natural gas started replacing coal as the main fuel source, and more importantly, the government was able to offer generous feed-in tariffs to attract investment into renewable sources.
The problem was that everything was based on politicians” willingness to increase prices to catch up to the market and phase out the tariff deficit, as it”s called In Spain. Not surprisingly, no government, left or right leaning, was willing to do so and the result is the debt just kept increasing to the staggering $26.5 billion owed today.
Not only consumers will pay for living beyond their means. The government has decided to cut subsidies for photovoltaic generators 30 percent for the next three years to save almost $3 billion, which comes after subsidy cuts earlier this year for the wind industry equal to about $300 million in the same period, and almost $1.2 billion for the concentrated solar power industry.
Traditional generators will also pay almost $600 million through 2013 for a new “toll” on power sales, and utilities will have to subsidize low-income families that won”t see their electricity bill increase at a cost of about $200 million. Also, utilities will have to pay almost $900 million for the next three years in efficiency measures that until now were passed on to consumers.
All in all, the government will save nearly $6.1 billion for the next three years at the expense of consumers, generators, and utilities. Meanwhile, investment in renewable energy has stalled and thousands have lost their jobs.
And even though the cash-strapped Socialist government of Prime Minister Jos’e Luis Rodr’iguez Zapatero has had no choice but to increase prices by 50 percent since 2005, including the surge that takes effect in just a few days, prices in Spain will remain below those in most of Europe.
That means more increases can be expected to pay off the power sector debt racked up in the past decade by 2013, the goal set by the government.
Those who touted the Spanish model assumed Spaniards knew what they were doing. And it wasn”t just the politicians. Consumers were happy paying very little for their electricity, which of course only led to more inefficiency.
So happy, most in the country agreed with the government”s plan to phase out nuclear power and to the blind support for costly renewable power. Of course they did. Who wants to live beside a nuclear power plant if you can have the sun doing that work, especially if it costs the same?
But it doesn”t. In fact solar power costs many times more. And now Spain begins a painful phase, on top of all other economic challenges, to correct its mistakes. The crisis triggered this good lesson that other countries should heed. A country”s economy demands a good power mix appropriate to its circumstances.
In Spain that will mean revisiting nuclear, cutting back on renewables and a lot less squandering of resources.
That is a reality check.